Facts of the Case:

  • The Assessee, Thomson Press (India) Ltd., operated multiple industrial undertakings, including NEPZ, Noida, qualifying for exemption under Section 10A of the Income Tax Act.
  • Interest on surplus funds in the NEPZ undertaking was credited in the books of the undertaking (eligible unit) and correspondingly expensed in the head office accounts (non-eligible unit).
  • Assessing Officer (AO) allowed the deduction under Section 10A.
  • Commissioner of Income Tax (CIT) invoked Section 263, holding that the inclusion of notional interest as profits of the undertaking was erroneous and prejudicial to the revenue. CIT enhanced the total income for AY 1991-92 and 1992-93.

Issues Involved:

  1. Whether notional interest can be included as profits and gains “derived” from an eligible undertaking under Section 10A.
  2. Scope and jurisdiction of CIT under Section 263 to revise an assessment order where multiple interpretations are possible.
  3. Whether deductions under Section 10A can include unreal or notional profits.
  4. Applicability of Section 80HHC turnover computations in conjunction with Section 10A claims.

Petitioner’s Arguments:

  • The orders under Section 263 were beyond the scope as AO’s assessment was not patently erroneous.
  • The interest credited had been accepted in prior years, establishing a consistent interpretation.
  • Section 10A treats eligible undertakings as separate entities; deductions should apply only to real profits, not notional interest.
  • CIT misapplied decisions relating to Section 80P, which are not analogous to Section 10A exemptions.
  • Reliance on Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) and CIT v. TEI Technologies (2014) 361 ITR 36 (Del) supporting the Assessee’s position.

Respondent’s Arguments:

  • Interest income did not have a direct nexus with the industrial undertaking’s business operations.
  • Notional credit does not represent real income; hence, it cannot form part of Section 10A profits.
  • Reliance on India Comnet International v. ITO (2013) 354 ITR 673 (SC), emphasizing the need for direct nexus between profits and eligible undertaking.

Court Findings / Order:

  • Only profits and gains directly derived from an eligible undertaking qualify under Section 10A; notional interest does not.
  • CIT rightly invoked Section 263 since AO’s inclusion of notional interest as part of eligible profits was erroneous and prejudicial to revenue.
  • Section 10A exemptions cannot cover unreal or notional income; eligible undertakings must be treated as separate entities.
  • Previous judgments related to Section 80HHC or Section 80P are not applicable due to differences in Chapter III exemptions vs Chapter VI-A deductions.
  • Appeals by the Assessee were dismissed.

Important Clarifications:

  • Section 10A(1) must be applied to real profits derived from the eligible unit.
  • Notional credits or internal accounting transfers cannot be treated as profits for exemption purposes.
  • CIT’s powers under Section 263 require both erroneous order and prejudicial effect on revenue, both of which were satisfied in this case.
  • Direct nexus principle: Income must originate from activities of eligible undertaking

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:8533-DB/VIB09102015ITA832003.pdf 

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